- USD/CAD attracts fresh sellers on Wednesday amid a modest USD decline.
- Dovish Fed expectations, coupled with a positive risk tone, weigh on the Dollar.
- Falling oil prices weigh on CAD, providing support ahead of Fed’s Powell intervention.
The USD/CAD pair is meeting some selling during the Asian session on Thursday and eroding some of the overnight recovery gains from the 1.3420 region, its lowest level since March 8. Spot prices are currently trading around the 1.3470-1.3465 region, down over 0.10% on the day amid a modest decline in the US Dollar (USD), although some follow-through selling around crude oil prices could help limit deeper losses.
The US Dollar Index (DXY), which tracks the greenback’s value against a basket of currencies, halts the overnight good bounce from the vicinity of the yearly low amid bets for another 50 basis points (bps) interest rate cut by the Federal Reserve (Fed) in November. Adding to this, the underlying bullish tone, as evidenced by a fresh boost in equity markets, further weakens the safe-haven dollar and exerts some downward pressure on the USD/CAD pair.
Meanwhile, doubts about sustained fuel demand growth in China, the world’s largest oil importer, and easing concerns about supply disruptions in Libya are dragging crude oil prices further from the three-week high reached on Tuesday. Despite a series of stimulus measures announced this week, investors remain uncertain about China’s economic recovery. This, along with signs of Libyan oil returning to the market, appears to be weighing further on the black liquid.
This, in turn, could weaken demand for the commodity-linked CAD and lend some support to the USD/CAD pair. Traders might also prefer to stay on the sidelines and refrain from placing aggressive directional bets ahead of speeches by influential FOMC members, including Fed Chair Jerome Powell, later during the North American session. In addition to this, US economic data will boost demand for the USD and create short-term trading opportunities.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian dollar.
The Bank of Canada (BoC) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment, but it can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
